Remember that generous couple, Stan and Serena Donor, who came up to you and said, “We’d like to give you $70,000, so you can purchase a home over there in Generikville.”
Ok, it’s never happened to me either, but it has happened to others. How do you respond to that gift? You dance, you cry with joy, but then you worriedly ask, “Do you need a receipt for that?” (You see the problem here, right? If they give it to you through your organization, your organization might take a small piece of it and some government somewhere certainly will. It will be taxed as income either by the US or, more likely, by the country in which you live.)
“No, don’t worry about that. We don’t need the tax deduction.”
So once again…you dance, you cry with joy, but then you worriedly ask, “Hey, what about the Gift Tax?”
The Potential Problem of the Gift Tax
Is this money a gift? No doubt about it. I would put it this way, “A gift is anything you give to someone.” The IRS is a bit more comprehensive:
A gift is made if tangible or intangible property (including money), the use of property, or the right to receive income from property is given without expecting to receive something of at least equal value in return. If something is sold for less than its full value or if a loan is made without interest or with reduced (less than market rate) interest, a gift may have been made. [Publication 559]
The gift tax is payable by the donor and not by the recipient unless special arrangements are made. That lets you off the hook but will Stan and Serena Donor want to pay the Gift Tax on $70,000?
A Generous Exception to the Gift Tax
The IRS explains the gift tax and one of its exceptions on their website,
The general rule is that any gift is a taxable gift. However…a separate annual exclusion applies to each person to whom a gift is made.
Beginning in 2018, the annual exclusion was up to $15,000. Not a bad start! That means Stan and Serena can give your family $15,000 toward the purchase of your new home. That’s worth dancing over, but what about the remainder of that $70,000?
An Even More Generous Criss-crossing of the Gifts
Well, it turns out that the IRS is a lot more open-handed than we thought. Did you notice the word “each” in that last quote? That means that the Donor family can give $15,000 to both you and your spouse. That’s $15,000 each. We’re now at $30,000! Yippee!
But that’s not all! Stan and Serena may be one in the Lord, but they are two for the IRS. In the same informative page, the IRS says,
If there is consent to split the gift, both spouses can apply the annual exclusion to one-half of the gift. For gifts made in 2017, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift.
So, if Stan and Serena both agree to give you and your spouse the cash, they can criss-cross their gifts to make it a whopping $60,000! Stan gives you $15,000 and he gives your spouse $15,000. Serena does the same. Let the dancing begin, right? But what about the extra $10,000 to arrive at that $70,000 amount. Isn’t the Donor family on the hook for gift taxes on that?
The Most Generous Exception of them All
Now, maybe you’d knew there was an annual exclusion to the gift tax. Maybe you even figured out that two people giving to two people could probably really stretch that exclusion to the max. I’d read about those things before and thought I knew everything I needed to know about it until I happened along this article over at NerdWallet this past week. To be honest, I didn’t believe it, so I searched some more until I found myself back on our trusty Publication 559:
Even if the gift or estate tax applies, it may be eliminated by the Applicable Credit Amount…. The…credit applies to both the gift tax and the estate tax…. Any applicable credit used against gift tax in 1 year reduces the amount of credit that can be used against gift or estate taxes in a later year. In 2017, the credit on the basic exclusion amount is $2,141,800 (exempting $5,490,000 from tax).
I was speechless! You’ll find blog after blog telling you how to be mindful of the Gift Tax or how to criss-cross the Gift Tax, but it all seems rather unnecessary. As James Kinney points out in that NerdWallet article,
Most taxpayers will never have to pay federal gift tax regardless of the size of the gift.
“…if you give more than the annual exclusion amount, you are supposed to file a gift tax return. However, that does not mean you owe any tax to the government. Remember that the gift tax was designed to keep people from avoiding estate tax. Federal estate tax applies only to estates of more than $5.43 million ($10.86 million for couples), and the gift tax shares this “unified credit” with the estate tax…. So unless you plan to leave more than $5 million or $10 million to your kids at death, worrying about gift tax should be the furthest thing from your mind!
That sounds too good to be true, so check with your US tax advisor, right? Well, that’s not all…
The Expat Exception
As you might imagine, the situation gets a bit murkier for those of us who live abroad. As far as I know, what we’ve discussed above are the regulations surrounding the Gift Tax in the USA. Before you start dancing again, you might want to send an email to your tax preparer abroad. If you pay taxes in the country in which you usually reside (as is my general advice), then you’ll want to ask your local tax preparer:
- Is there a Gift Tax here?
- Does the donor pay it or does the recipient pay it?
- What are the limits on the Gift Tax (yearly and lifetime)?
- What happens if the donor is a US tax resident and the recipient is not?
Unless the Donor Family will be leaving millions of dollars upon their demise, the US government will only require them to file a form declaring the gift without paying a dime. It may be true in your situation as well, but don’t forget the extra layer of difficulty created by living abroad.
That’s why I created this little blogsite. To warn us of possible financial missteps, by the nature of our life as expat nonprofit and missionary workers in the complicated financial world of Vagabond Finances. Any way it works out, Stan and Serena deserve our utmost gratitude and, why not, a little dancing!